In the interview below, Karatz discusses achievements to date and the outlook for the future.
HBE: Describe Kaufman & Broad.
BK: Our corporate offices are in Los Angeles. We have 15 housing divisions throughout California, from San Diego to Sacramento, also in Las Vegas, Phoenix, Salt Lake City, Denver, Albuquerque, Dallas, Austin, San Antonio, Mexico City and Paris, France. In addition, we have our own mortgage company which furnishes almost 80% of our home buyers with home mortgages, and a multi-family division that builds apartments for both seniors and families under government tax-credit programs.
HBE: Define your role at Kaufman and Broad.
BK: I set the overall objectives for the corporation. I focus on expansion opportunities, key personnel issues, and key strategies to be implemented throughout the company.
HBE: What have been the highlights this year for Kaufman and Broad?
BK: The highlights are on the financial front. Our earnings will be substantially higher than the year before. We're looking at the fastest growth in earnings in the industry. There is also the implementation of KB2000, which is already showing very positive results. Our recent expansion in Texas is very satisfying too.
HBE: What is Kaufman and Broad's business strategy?
BK: The strategy of the company has been to focus on operating performance rather than on top-line growth. We have seen our operating performance improve dramatically over the last couple of years. In California, we firmly remain the state's number-one builder with revenues of approximately $1 billion. Out-of-state revenues have grown dramatically. This year, we anticipate business to be up by about 25% company-wide; out-of-state growth will be in excess of 40%.
HBE: How is the California market?
BK: California is both our home state and one of the largest real-estate markets in the country, so naturally it's very important to us. We believe the new-home business has a bright future in California even though the new-home market has averaged less than 80,000 units a year since 1990, down 30% from the average for the 1980s, and down 50% from the peak of 160,000 units in 1989. It appears that the home-building business in California is starting to recover. Our net orders in October were up 25%, and absorption rates were up 27% in the third quarter. While we have no expectation of the salad days of 1989, we do believe there is reasonable potential to achieve improved operating margins over our 1996 performance.
HBE: Do you see unit pricing improving in California?
BK: The price deterioration has stopped. We lived through years when prices were bobbing up and then down. Now, we feel that the bottom has been reached and there will be some upward mobility; it is just that we haven't yet seen much.
HBE: Where will the growth come from for Kaufman and Broad?
BK: We will maintain our focus on the western U.S. and are open to considering additional acquisitions or new market entry. In existing markets we've selected eight markets where we believe we can grow faster while continuing to get good returns. Three of these markets are in California and five are in other western states. From the accelerated growth markets, we expect to generate 3,000 additional units per year by 1999. Our target for new markets is to generate an additional 2,000 unit deliveries by 1999. Combining new existing and new markets, we are targeting to grow our business in total by 6,000 units per year, or nearly 60% more units than 1996. We are off to an excellent start with our entry into Austin where we are targeting 700-plus units in 1998, our second year of operations. We see other new markets of interest in Texas.
HBE: Specifically?
BK: We've made considerable in-roads in Texas. I believe we are the second-largest homebuilder in Texas. Our operations in Dallas and Austin, which are really in their infancy, are growing dramatically. And I would suspect by this time next year, we will be building homes in Houston. We see tremendous growth in Texas for our company in 1998 and beyond. We ultimately envision the potential for 7,000-plus unit deliveries in Texas alone.
HBE: Why isn't Kaufman and Broad in the manufactured-housing market?
BK: Back in the 70s, we were the fifth largest manufactured-home producer in the U.S. So we've already been in the business. In the early 80s we built a large community in southern California that married manufactured units to permanent foundations. While the experiences were interesting, the conclusion we reached is that [on-site] building and manufactured housing are two distinct businesses. The methods of sales are entirely different, the types of customers are for the most part different, financing is different, and the disciplines in manufacturing are different.
HBE: How would you assess the prospects for the housing market in 1998?
BK: As best as I can predict, I believe 1998 will be a very strong year for housing in the United States. The principal reason is that interest rates are so attractive. In this kind of interest-rate environment, it makes good sense for people to buy a home. The numbers of course will vary economy by economy, but California should remain strong, which could give a boost to national statistics. Good economies throughout our country will make housing one of the strong segments of the economy.
HBE: What is the financial condition of Kaufman and Broad?
BK: Since Aug. 31, we have been active in revising our debt structure. On Sept. 4, 1997 we called $100 million 10 3/8% senior bond issue at par; and late last month we issued $175 million of new senior bonds at 7 3/4%. This should set our capital structure for the foreseeable future, absent any unusual corporate developments. We have $400 million to $500 million of unused credit under our credit facility. On the capital side we are well positioned. Our stock has performed extremely well in 1997. It is up almost 90% and we are on a strong growth path which we hope will continue into 1999.
HBE: What is the most important issue facing you right now?
BK: The implementation of the KB2000 program.
HBE: Give us an update on KB2000.
BK: KB 2000 is not quite 18-months old and it is having a positive effect on all of Kaufman and Broad. KB 2000 is a proven operational business model that is intended to take Kaufman and Broad to the next level of performance, that is not only very profitable, but also predictable, consistent, and sustainable. It is a much more disciplined approach to the home building business, focusing on surveys to determine buyer needs as well as specific values that home buyers place on various parts of a home. So, what we are offering is greater choice to the home buyer as well as greater value, because today we know better what values home buyers place on specific aspects of their home. We have changed our operating policy, from building a large number of homes that are not sold, believing they will get sold during the construction period, to a policy whereby we sell a home first and then build it. The effect of all of this is that better than 70% of homes we start are sold. We are growing our business in a less risky, less capital-intensive way.
HBE: What insights did you gain from the first KB2000 survey?
BK: It varies quite a bit by region. We have already surveyed over half a million people in our first round and are in the process of completing the second survey in eight divisions. The bottom line is people want space - more square footage for their money. That can mean big kitchens, with lots of cabinets and countertop space, for example. In Texas, they want pantries. In Colorado, they want lots of fireplaces. They also tell us where they want to live in their particular area. But the constants are space and having a choice in the structure of the house.
HBE: How many KB2000 communities are there now?
BK: We have opened about 20 communities that are fully KB2000. That effort is going fast or slow depending upon the city you are looking at. One of the challenges is in communities where we have already gone through the entitlements stage. We don't want to go back and start over again by introducing different kinds of products. A lot of our business was already off and running before we implemented KB2000. It will be some time before the entire company has fully implemented KB2000. The business model goes beyond simply what the product is. It is a business model that is now being implemented. As each month goes by, a higher percentage of our communities will have KB2000 products.
HBE: How many new home showrooms are open?
BK: We are opening new-home showrooms in Northern California, Southern California, Las Vegas, Albuquerque, and Utah. Within three or four months, we should have showrooms opened in every one of our divisions, seven by the end of the year. Kaufman and Broad pioneered what we called the Core Centers, which were spaces independent from a particular subdivision, where home buyers could come in and make a selection of carpets, tiles, or many other features that we gave them. This showroom is really a continuation of that into a 2000 style decor center which we now call new-home showrooms. They are much larger and offer much greater choice. They really have a more retail feel than what we've had in the past. It is offering the home buyer a greater value than what they had before.
HBE: How are your national accounts with suppliers developing?
BK: We have a national contracts department that has been active now for over six years and has worked very well for us. It is for those products that we use that can be delivered to all of our locations. There are some products that are national and some products that are regional. There are some building materials that really work better regionally rather than nationally. We do believe that it makes sense to take advantage of our size to offer greater value to the customer, allowing us to compete more favorably with smaller competitors.
HBE: Where do you see those efficiencies?
BK: They would be in appliances, plumbing fixtures, windows, and doors.
HBE: What is your management team like?
BK: Our headquarters office staff is small, and each person is focused on the business being done out in the divisions. With the exception of a small treasury function which takes care of financing our business, everyone else here is either on the road or on the phone dealing with the issues of our business. Home building is still a very local business, and the conditions that exist in one city may be slightly different in another.
HBE: What is the biggest change you've experienced recently in selling homes?
BK: One of the biggest changes is that we have been operating in a non-inflationary environment, and that continues to put pressure on the builder to operate efficiently, which means efficient design, efficient operation with sub-trades, and efficient construction cycles. Construction is often a very inefficiently run business. We have to be constantly sure that what we are offering, carries better value than the consumer can buy in a used home.
HBE: Where do you see Kaufman and Broad five years from now?
BK: Five years from now, certainly in any market that we are in today, we will be a leading home builder in that market. You are going to see Kaufman and Broad as a much larger company than it is today.
Reprinted from Home Builder Executive
For More Information Contact:
Kate Mulhearn
(310) 231-4015
kmulhearn@kbhome.com